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Labor Market Dynamics under Long Term Wage Contracting

  • Leena Rudanko

    ()

    (Boston University)

Recent research seeking to explain the strong cyclicality of US unemployment emphasizes the role of wage rigidity. This paper proposes a micro-founded model of wage rigidity – an equilibrium business cycle model of job search, where risk neutral firms post optimal long-term contracts to attract risk averse workers. Equilibrium contracts feature wage smoothing, limited by the inability of parties to commit to contracts. The model is consistent with aggregate wage data if neither worker nor firm can commit, producing too rigid wages otherwise. Wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2008-003.

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Length: 21
Date of creation: Dec 2008
Date of revision:
Publication status: published, Journal of Monetary Economics, 56, 2 (March 2009)
Handle: RePEc:bos:wpaper:wp2008-003
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Web page: http://www.bu.edu/econ/

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